Motorcar Parts of America, Inc.

Good afternoon, my name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the Motor Car Parts of America Third Quarter 2024 webcast and conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Gary Mayer, Vice President of Communications and Investor Relations, you may begin your conference.

Thanks, Rob. Thanks everyone for joining us for our call. Before we begin and I turn the call over to Selin Jathi, Chairman, President and Chief Executive Officer and David Lee, the company's Chief Financial Officer, I'd like to remind everyone of the Safe Harbor Statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during today's conference call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Motor Car Parts of America. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based upon various factors. In particular, expectations that anticipated future growth and opportunities with customers may not be achieved. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the various filings with the Securities and Exchange Commission. With that, I'd like to begin the call and turn it

over to Selwyn. Thank you, Gary. I appreciate everyone joining us today. We are encouraged by operating results for the quarter, including strong sales performance, increased gross margins, increased EBITDA, and significant positive cash flow, and a revolver paydown of $50 million to $102.8 million of net debt. While some of this cash flow resulted from deferred collection catch-up in the quarter, for the nine months we generated $48.4 million in positive cash. I might add that these results were particularly impressive considering the industry softness in November and December. Recent extreme weather conditions throughout the country should help bolster this industry sales softness in future quarters. We were also pleased that gross profit for the quarter and nine months increased substantially. Gross margins continued to improve and benefit from better operating efficiencies as anticipated, particularly from increased overhead absorption with higher sales and production in newer product categories. I should also add that price increases in effect but not yet realized will contribute an additional $10 million in annualized sales and gross profit and EBITDA. We remain focused on three key initiatives, sales, profitability, and neutralizing working capital. We are confident that our sales and profitability will grow organically and through market share gains in all of our product lines. Increased profitability along with our working capital initiatives will further enhance cash flow generation. With regard to working capital, we continue to focus on the balance sheet including extending vendor payment terms. This initiative is being supported by the launch of our vendor finance program offered to our suppliers. This enables us to extend our payment terms while facilitating a program for our suppliers to have early access to capital. We expect to increase the number of days outstanding for accounts payable which will result in additional cash generation. While in its early stages, this program is progressing nicely and will gain increased traction in the months ahead. I should note that the effects of this program are not yet reflected in our results and will provide additional upside to cash flow generation. From a strategic standpoint, we are continuing to leverage our strengths including great products, manufactured at -the-art facilities, solid customer relationships, industry-leading skew coverage, not to mention our value-added merchandising and marketing support. We are continuing to expand hard part sales in Mexico with opportunities to further expand in other Latin American countries with multiple product lines as our customers experience increased demand for aftermarket products. The rate of growth is exciting and we are well positioned to utilize our footprint to meet the growing demand for our non-suscriptionally aftermarket products. Our test solutions and diagnostic equipment in particular, our industry-leading JBT-1 benched-up testers for alternator starters used by major automotive retailers and professional installers continues to grow significantly. We believe the market opportunity for additional growth in the U.S. is approximately $110 million. And we are well on our way. Favorable industry dynamics continue to bode well for the company and we are extremely well positioned for sustainable top and bottom line growth in our hard parts business as well as the testing solutions. Let me take a moment to further discuss our near-term initiatives to support our long-term growth and profitability plan. Our near-term plan is in motion as we expect to achieve significant growth in all of our business. Our growth in the U.S. continues to gain significant market share within the professional market. This includes our most recent additions to our portfolio of brake calipers, pads, and rotors. Operating efficiency improvements are continuing as volume increases. Overall, this growth is supported by investments, especially the company's global footprint expansion in Mexico, backed by a well-trained and seasoned team of professional employees. Also, we have expanded our Malaysian operation to add capacity and additional capabilities to support customers. We recently opened a new -the-art wheel hub manufacturing facility in Malaysia, enabling us to ship product directly to our customers. Congratulations to our spectacular operating team, especially to those in Singapore and Malaysia. Our business growth is strategic and we are focused on generating solid cash flow and profitability. The strong cash generation will enable us the flexibility to further pay down debt and pursue other related opportunities to enhance shareholder value. In conclusion, non-discretionary aftermarket parts for the internal combustion engine market will be here for decades, and Outlook supported by recently updated industry data showing that the average age of vehicle is 12.5 years. It is worth highlighting that the population of vehicles operating with internal combustion engines versus EVs represents approximately .3% of all vehicles on the road. One of our key competitive advantages is our ability to offer a broad range of applications for all makes and models. We remain focused on newer model applications and our ability to meet expected demand that these vehicles enter the replacement market. As you probably know, the emerging electric vehicle market is still quite small relative to the overall car park population. Recent news articles regarding EV range, particularly in cold regions in the country, contribute to consumer hesitancy to plug in. But as technology improves and these types of issues are addressed, we expect to continue to benefit in both markets with product functionality and applications across both EV and ICE applications. While I am disappointed in the tax valuation allowance, I want to emphasize that it has no bearing on any operating metrics, cash flow, tax liability, or any economics of the company. It is simply required by GAAP. Finally, we recently announced change to our sales team. Jamie Cook has been promoted to Senior Vice President of Sales and Marketing. She is succeeding Rick Machulski who will transition to a new role as Senior Vice President of Business Development. Jamie and Rick have worked closely together at MPA for many years. Jamie is recognized throughout the automotive aftermath. She is an exceptional leader with the added benefit of being a role model for women seeking to advance in the industry. Rick will remain an important member of our team in his new role, helping to drive demand for all of our products, both from existing and new retailer professional customers. I'll now turn the call over to David to review our results in greater detail.

Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issue this morning, as well as the 10-Q that we file later today. Let me first provide key highlights for the fiscal third quarter. Net sales increased .2% to 171.9 million. Gross margin improved by 3.7 percentage points. Gross profit increased .1% to 30 million. Operating income increased .1% to 9.5 million. And the company generated cash of approximately 53.6 million. I should mention that gross profit for the quarter was impacted by non-cash items, as well as cash items. The non-cash items reflect core and finished goods premium amortization and revaluation of cores and customer shells, which are unique to certain of our products and required by the app. The total for these non-cash items in the quarter was approximately 4.4 million. A more detailed explanation of core accounting is available on our website, and I would encourage anyone with questions about this topic to review the video. Third quarter gross margin was 17.5%, compared with .8% a year earlier. Gross margin was impacted by .6% from the police-executed non-cash items, as well as .9% from cash items, as detailed in Exhibit 3 of this morning's earnings press release. In summary, in addition to the non-cash and cash items explained previously, gross margin for the fiscal 24th quarter reflects the partial benefit of pricing increases that went into effect during the current quarter and operating efficiency. Additionally, we have meaningful annualized pricing increases that started in the current fourth quarter, which will further contribute to gross margin enhancement. Operating expenses were 20.5 million, compared with 17.5 million in the prior year period. This included a non-cash gain of 3.1 million for the foreign exchange impact of lease liabilities and Florida contracts, compared with a prior year non-cash gain of 4.3 million. The remaining 1.9 million of operating expense increases included employee-related expenses. Operating income for the third quarter increased .1% to 9.5 million, from 3.5 million in the prior year. Results for the fiscal third quarter were impacted by 6.8 million, or 26 cents per share, of higher interest expenses, primarily due to higher market interest rates and higher utilization of the accounts receivable at discount program due to higher sales. Interest expense was 18.3 million, compared with 11.5 million for last year, which is primarily related to our customers' accounts receivable discount program. We are working diligently to address the higher interest environment, particularly areas that we can control. For example, among other initiatives, we are focused on neutralizing working capital to generate positive cash flow to pay down debt, as evidenced by our -to-date results. In addition, we continue to work with our customers to mitigate higher interest rates. Due primarily to a 37.5 million U.S. federal and state deferred tax asset valuation allowance under U.S. GAAP recorded during the fiscal 24th or third quarter, income tax expense was 37.3 million, compared with an income tax benefit of 9 million for the same period a year ago. Let me emphasize that this tax valuation allowance is required by GAAP and is non-cash and does not impact any operating metrics. Due primarily to 40.4 million of non-cash items, including a 37.5 million U.S. federal and state deferred tax asset valuation allowance under U.S. GAAP noted previously, we reported a net loss for the fiscal 24th or third quarter of 47.2 million, or $2.40 per share, compared with net income of 1 million, or $0.05 per diluted share a year ago. To reemphasize, this accounting item is non-cash and does not impact any operating metrics. The details of the non-cash and cash items impacting results are in Exhibit 1 of this morning's earnings press release. As I mentioned previously, we experienced a .2% sales increase, despite industry softness in November and December, with its higher expected sales volume moving forward, and the full impact of certain price increases already in effect. Results are expected to further improve. As someone mentioned, I should also add that price increases in effect will contribute an additional 10 million in annualized sales, gross profit, and EBITDA. EBITDA for the fiscal third quarter was 11.2 million. EBITDA was impacted by 3.9 million of non-cash items and impacted by 1.9 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was 17 million for the third quarter. EBITDA for the prior year's fiscal third quarter was 6.6 million. EBITDA was impacted by 646,000 of non-cash items, as well as 3.8 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was 11 million for the prior year's third quarter. Now, let me discuss the nine-month results. Net sales for the fiscal 24 nine-month period increased .2% to a record 528.2 million from 488.3 million. Gross profit for the fiscal 24 nine-month period increased .6% to 97.8 million from 77.8 million a year earlier. Gross margin for the fiscal 24 nine-month period was .5% compared with .9% a year earlier. Gross margin for the fiscal 24 nine-month period was impacted by 12.6 million or .4% of non-cash items and 6.7 million or .3% of cash items. Operating income for the nine-month period increased .7% to 33.9 million from 12.7 million in the prior year. Results for the nine months were impacted by 17.7 million or 68 cents per share of higher interest expenses, primarily due to higher market interest rates and higher utilization for our customer's accounts receivable discount program due to higher sales. Interest expense was 45.4 million compared with 27.7 million for last year. As I previously noted, we are working diligently to address the higher interest environment, particularly areas that we can control. Due primarily to 49.5 million of non-cash items, including a 37.5 million U.S. Federal and State deferred tax assets valuation allowance under U.S. GAAP, we reported a net loss for the fiscal 24 nine-month period of 50.6 million or $2.58 per share compared with a net loss of 5.7 million or 29 cents per share a year ago. Once again, this accounting item is non-cash and does not impact any operating metrics. The details of the non-cash and cash items impacting results on Exhibit 2 of this morning's earnings press release results are expected to improve from various initiatives that will be realized, as I discussed earlier, concerning price increases in effect and higher sales volume. EBITDA for the fiscal 24 nine-month period was $40.9 million. EBITDA was impacted by $16 million of non-cash items, as well as $7.7 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $64.7 million for the current period. EBITDA for the prior year fiscal 23 nine-month period was $22 million. EBITDA was impacted by $12.9 million of non-cash items, as well as $12.6 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $47.5 million for the prior year nine-month period. Now we will move on to cash flow and key corporate items. The company generated approximately $53.6 million of cash from operating activities during the quarter, including accounts receivable catch-up from the prior quarter, and approximately $48.4 million of cash from operating activities for the nine-month period, which is not impacted by any accounts receivable deferrals. During the nine-month period, the company reduced net bank debt by $43.7 million to $102.8 million from $146.5 million. We expect to generate an increase in operating profit on an -over-year basis for fiscal 24, supported by organic growth from customer demand and operating efficiencies from our now completed split print expansion, and generate positive cash flow for fiscal 24. In addition to our goal of generating increased operating profits, we are diligently focused on opportunities to neutralize working capital growth, including customer product demand planning, enhanced inventory management, and improving vendor payment terms. Our investments are bearing fruit. We are gratified by the ongoing success of our expanded operations in Mexico and the growth momentum of our emerging break categories, along with expectations of increasing financial performance from both new and existing product lines. Our net debt at the end of the quarter, excluding our convertible note, was approximately $102.8 million, while total cash and availability was approximately $126.3 million. For further explanation on the reconciliation of items that impacted results in non-GAAP financial measures, please refer to Exhibits 1 through 5 in this morning's earliest press release. I would now like to open the line for questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Your first question comes from the line of Matt Corunda from Roth MKM. Your line is open.

Hey guys, it's Mike Zabron on for Matt. Can we just start, like usual, with the breakdown of product revenue by mix?

Yes. So for the third quarter, rotating electrical was 65%. Brake related products was 21%. Wheel hubs was 11%. And others was 30%.

Got it. Helpful. So the release and on the call, you talked about a slowdown in November, in December. Maybe just elaborate a little bit further on what exactly happened and what's our sense for wide demand was weak in those months?

Well, we started off the quarter with a great October. And I think a lot of the professional installer base got soft. I think we had some pretty mild weather. I mean, again, it's very hard for me to really put an accurate finger on the pulse as to why things softened up. The fundamental metrics remain good. But we've seen that now that there was some extreme weather, mostly in the West and East part of the country, we've seen a pickup. So while it's hard to predict, I mean, we're maintaining our guidance for the year and we're optimistic it should come back. I mean, I just don't know. I wish I could give you an exact, you know, XYZ explanation as to why this happens. The other issue that we have is that, and I don't know if this is a fact or not, but sometimes it's our customers calendar year ends and maybe they're managing their working capital levels. So that could have an effect as well. But really, I think the fundamentals for November, December on a macro level across the industry, across the base, definitely was a little softer out there in particular. I mean, I can only refer to our products, but we think that just number of vehicles and footprint research that we've shown showed a little bit softer.

Got it. OK. And so when you said we are sticking with the guidance through the end of the year.

Yeah, so we've got a strong start to this quarter and we'll see, you know, as we come towards spring, you know, we're optimistic still about about demand. We're busy and yeah, we're sticking to our guidance.

Got it. OK. OK, maybe maybe just help level set us on how much pricing has been put through as of today. We talked about it a little bit on the call, but just further elaborate on how much pricing has been put through today. Should we expect to keep continuing to take price and then have a follow up as well? But maybe let's just start there.

Yeah, so it's becoming harder and harder to quantify, you know, how much is put through and how much isn't put through. I mean, we put a significant amount through this. There's ten million dollars of annualized pricing that's already in the existing pricing pieces hasn't been reflected in the numbers that will start in this quarter. And, you know, we expect to mitigate inflationary costs and hopefully including interest in pricing strategies. We also as we pick up volume, you know, we become more operationally efficient. And, you know, we've got a lot of initiatives on continuous improvement that continue to drive profitability. So across the board, I mean, our biggest challenge today, you know, is mitigating the interest expense and the interest expenses is due. The vast majority is due to more success with sales. And, you know, with the new loan agreement that we have, we're able to collect that cash and you can see our operating metrics. We've paid down over 40 million dollars in debt for the nine months. I think the quarter is a little disproportion because of some of the deferrals, but the nine months is not. And so, you know, we I think everyone is aware of the interest rates and we expect to continue to mitigate it.

Got it. Makes sense. And so then the price increases that we started in the fourth quarter, I guess, when do when do those fully filter through? Do we do we have a sense for that?

Yes, so they start in the fourth quarter, just assume in a middle to late fourth quarter, but they filter through going forward on an annualized basis. All those is another 10 million that'll be over and above what we've already got in the numbers for the next 12 months.

Got it. OK, so they'll start filtering through as soon as. Right. OK. Got it. OK. That makes sense. Last one for me, the the tax valuation allowance to understand it was required by gap and to non-cash expense. We made that very clear. Maybe just why why exactly did we have to recognize that allowance? It's helped us get a better sense for that.

Yeah, so the the first thing, let me just sort of back up and say it's those assets remain on our balance sheet and we're optimistic that we're going to be able to use those assets. And as we get more gap income, we'll be able to reverse it and it'll take some time. But assuming the company performs, which we expect to will reverse them, that doesn't affect our tax liability. It doesn't affect cash. It doesn't affect anything. And the real the trigger is that we had a higher expectation for results in the third quarter in this past quarter that we're reporting on. And we had a soft two months out of the three months. And we had to revise our we had to. We did revise our forecast, internal forecast down. And that results in a in a taxable loss in the US entities. And so we had to put a reserve on the tax asset. It's unfortunate. I hate it, but it's the rules. And that's what's happened. And again, while the optics of it and the rules of the rules in no way affects us other than what the perception is out there, no way affects us in terms of anything that we're doing right now. And our focus continues to drive to drive gap income and all income. And so as that reverses those assets, that valuation will come off the assets.

Got it. Thanks, Tom. That's all from us. Thank you very much.

Again, if you'd like to ask a question, press start on a telephone keypad. Your next question comes from a line of Matt Dane from Titan Capital Management. Your line is open.

Great. Thank you. I wanted to ask about the new Malaysian facility that you referenced in the call. Let's hope you could walk through some of the benefits that you expect from that. I just wasn't certain if you were just expanding capacity or if there's other benefits or should tell me to have that.

So that's a great question. That's very exciting for us. What we did there is we opened a you know, we've been in Malaysia. I wish I knew the exact number of years. I mean, probably over three decades. And we've been able to continue to grow the old facility. What we've done is we've created a brand new state of the art facility, which allows us now to meet all the tests to ship our customers direct from Malaysia to our customers. So it will never be touched here. So Wheelhub's, the new Wheelhub program, which we, you know, which is in line with what we've been doing, the same thing now has more capacity to go direct with storage for that inventory, staging areas for that inventory, to be shipped directly to our customers around the world, but in particular in the United States. And that's a big deal because our competitors are Chinese based and they have a subject to tariffs. And our customers buy large orders of this and so want to take ship direct programs. And we think that's going to open up some big opportunities going forward. I think short term, you'll see a little bit of a dip in that product line. And then in the next six months, we should see some extreme, I think we'll see some extreme gains in that product line. So very exciting. And it's a fabulous plant. We already had a major customer visit and who was extremely impressed with it. I mean, and that's all in the capex. It's all paid for and done.

Okay. So you expect this plant and the cost efficiency of shipping directly to the customer basically to lead to some substantial revenue gains as you gain share from your Chinese competitors. Is that what I heard you say more or less? Yeah,

I think we'll see margin gain and share gain in

time. Great, great. Glad to hear. I also did want to ask about the quality build product line and reference that very briefly in the call as well. Just curious, the traction that you are seeing with that product line, how is that relative to your expectations?

It's well, we have high expectations. I'll start there. So the answering relative, every time I get results of how we're doing, my expectations grow. But I mean, we're growing that, you know, we've had over 40 percent growth rates in that product line and in that product branding name. And it's becoming a nationally recognized brand. And I'm extremely excited about how that's unfolding. We're we're adding many new customers to that, to the break line under quality built name. And we're just getting more and more demand for quality built. And so that brand value and that brand equity, you know, we're excited about that. The other side of that is there's no there's no factory cost. There's no supply supply chain cost on launching and growing that business. So that's also encouraging to us.

OK, good to know. I appreciate it. Thank you. Thank you.

And there are no further questions at this time. I will now turn the call back over to Selwyn Joffe for some final closing remarks.

OK, thank you. So just in summary, we're excited about your data accomplishments and our outlook, in particular, our strong cash flow, our paydown of debt. We expect the further benefit of additional price increases and the opportunities to further enhance shareholder value. We're encouraged by our leadership position in the industry and our solid customer partnerships. We've built a platform for growth that is not easily duplicated. And we expect this to this growth to continue on in the future, especially as the demand for non-distribution aftermarket products. So the critical need for consumers, the cars are on the road, the car population continues to grow and non-destruction parts will be there. There may be temporary ups and downs, but long term, medium term and near term, the demand will be there. In closing, I must recognize the contributions of all of our team members who are continuously focused on providing the highest level of service. We're all committed to being the industry leader for parts and solutions that move our world today and in the future. We appreciate your continued support and we thank you again for joining us on the call. And we look forward to speaking with you when we host our fiscal 2024 Euroend conference call in June and at the various investor conferences in the interim. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.